Finance Exam 1 Study

Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2006 Luther's diluted earnings per share are closest to ________.

$1.03 Diluted EPS = Net income / (Shares outstanding + Options contracts outstanding + shares possible from convertible bonds outstanding) = 10.6/(10+0.3+0.0) = 1.03

At an annual interest rate of 7%, the present value of $5,000 received in five years is closest to

$3,565 = Future value / (1 + r)n = $ 5,000 / 1.07^5

The beginning and ending balances of Net Fixed Asset on the balance sheet of Lowe's Industry the past year is $158 and $ 195, respectively. The company neither sold or salvaged any assets during the past year. If the depreciation expense on fixed asset last year is $ 28, how much were the company's capital expenditures during the past year?

$65 Capex= Ending Net Fixed Assets - Beginning Fixed Assets + Depreciation = $ 65

Refer to the balance sheet above. Luther's quick ratio for 2016 is closest to ________.

.84 Quick ratio = (Cash equivalents + AR) / Current Liabilities = (65.5 + 54.4) / 143.2 = 0.84

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008?

0.50 EPS = Net income / Shares outstanding = $10 million / 20 million shares = $0.50 per share

Refer to the balance sheet above. Luther's current ratio for 2016 is closest to ________.

1.11 Explanation: Current ratio = Current Assets / Current liabilities Current ratio = 160.3 / 144.1 = 1.11

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Luther's market-to-book ratio would be closest to ________.

1.29 MTB = Market Value of Equity / Book Value of Equity = (10.2 million × 16) / 126.7 = 163.2 / 126.7 = 1.288

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

1.72 Explanation: D / E = Total debt / Total equityTotal Debt = Notes payable (10.5 ) + Current maturities of long-term debt (39.6 ) +Long-term debt (231.3 ) = 281.4 millionTotal equity = 10.2 × $16 = $163.2, so D / E = $ 281.4 / $163.2 = 1.72

You are to receive $100 in one year from now, $200 in two years and $300 in three years. If the current market interest rate is 9%, the present value of these cash is

100/(1.09)^1 = 91.74 200/(1.09)^2 = 168.34 300/(1.09)^3 = 231.66 =491.74

Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

2.25 Explanation: D / E = Total debt / Total equityTotal debt = Notes payable (10.7) + Current maturities of long-term debt (38.7) + Long-term debt (234.4) = 283.8 millionTotal equity = 125.9 , so D / E = 283.8 /125.9 = 2.25

There is cash inflow of $500 today and a cash outflow of $500 two years from now. If the current market rate of interest is 8%, then the value of these cash flows as of year 1 is closest to

= 500(1.08) - 500/1.08 = 77

If the current market rate of interest is 10%, then the future value of $500 today in 3 years is closest to

Cash flow at year 0 = $500Rate of interest = 10% N= 3 years Value of cash flow at year 3 = Cash flow at year 0*(1+Rate of interest)^N= 500*(1+10%)^3 = 500*(1.10)^3 = $665.5

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Luther's enterprise value?

Enterprise value (EV) = Market Value of Equity + Debt - Cash MV of Equity = 10.2 * $16 = $163.2 Debt = the sum of short term debt, Current Portion of LT debt and LT debt = 10.9 + 40.7 + 227 = $278.6 So EV = 163.2 + 278.6 - 56.1 = $385.7

You are to invest $1,000 now, $2,000 in one year, $3,000 in two years and $4,000 in three years in a savings account with an interest of 8%. How much will you ave in four years?

FV = (1000*1.08^4) + (2000*1.08^3) + (3000*1.08^2) + (4000*1.08) = 11,699

If the current rate of interest is 8%, then the future value 20 years from now of an investment that pays $1,000 per year and lasts 20 years is closest to:

FV = (C/r)((1+r)^N - 1) = (1000/0.08)((1+0.08)^20 - 1) = 45,762

Consider a growing perpetuity that will pay $100 in one year. Each year after that, you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment. This pattern of payments will continue forever. If the interest rate is 11%, then the value of this perpetuity is:

Growing perpetuity = C/(r - g) = 100 / (.11 - .06) = 2,000

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

Investors believe the company's assets are not likely to be profitable since its market value is worth less than its book value.

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 5 million shares outstanding, and these shares re trading at a price of $6.39 per share, what does this tell you about how investors view this firms's book value?

Investors consider that the firm's market value and its book value re roughly equivalent. The market value of equity is per share price * # of share outstanding: 6.39 * 5 = 31.95 million roughly the same as the book value of equity 32 million

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?

It adds all non-cash entries related to a firm's operating activities.

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?

It would be an addition to property, plant and equipment so it would be an investing activity.

The above diagram shows a balance sheet for a certain company. All quanities shown are in millions of dollars. hat is the company's net working capital?

Net Working Capital = = Total Current Assets - Total Current Liabilities = 89 mil - 44 mil = $45 million

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?

Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly

If the current rate of interest is 8%, then the present value of an investment that pays $1,000 per year and lasts 20 years is closest to:

PV = C/r*(1-1/(1+r)^N = 1000/0.08(1-1/(1+0.08)^20) = 9,818

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to ________.

PVP = C / (r - g) = 10,000 / (0.06 - (-0.08)) = 10,000 / .14 = 71,429

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company are most likely to be true?

Since net working capital is negative, the company will not have enough funds to meet its obligations

A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.

You are saving for retirement. To live comfortably, you decide that you will need $2.5 million dollars by the time you are 65. If today is your 30th birthday, and you decide, starting today, and on every birthday up to and including your 65th birthday, that you will deposit the same amount into your savings account. Assuming the interest rate is 5%, the amount that you must set aside each and every year on your birthday is closest to:

There are 36 deposits in total PV (at age 29) = 2,500,000 / (1.05)^36 = 431,643.54 So now, PV = 431,643.54 FV = 0 I = 5 N = 36 Computer PMT = $26,086 Or, using PV formula for annuity: 431,643.54 = C/(0.05)(1-1/1.05^36) Solve for C: = 26,086.17

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

as an outflow under investment activities

Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008?

by issuing debt

Which of the following is NOT an operating expense?

interest expense

What is a firm's gross profit?

the difference between sales revenues and the costs